Loonie support grows in Iceland as 70% back adopting Canadian currency

Iceland appears to be increasingly open to adopting the Canadian dollar as its official currency, with Prime Minister Johanna Sigurdardottir warning over the weekend that the country’s own extremely volatile currency system “can’t remain unchanged.”

“The choice is between surrendering the sovereignty of Iceland in monetary policy by unilaterally adopting the currency of another country, or become a member of the EU,” Ms. Sigurdardottir said in a speech delivered at a Social Democrat Alliance party convention Saturday in Reykjavik.

Last month, a Capacent Gallup poll found 26.3% of Icelandic voters support European Union membership while 56.2% were opposed to the idea.

That leaves the door open to other currencies.

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While currencies such as Norway’s krona or Japan’s yen have reportedly been considered, Canada’s loonie has recently been cited as a frontrunner ahead of even more popular currencies such as the United States’ greenback.

Loonie support has been growing in Iceland since last summer when the country’s opposition Progressive Party began floating the concept in the media, with party chairman David Gunnlaugsson pointing to a recent poll suggesting as many as 70% of Icelanders would support their country adopting Canada’s currency.

The tiny island nation has been vying to join the EU since the summer of 2010 and hopes to hold a national referendum on the matter by early next year. EU membership will allow Iceland to “cooperate with EU countries as a sovereign nation, which has a say in the decision and policymaking in all fields of cooperation,” the Prime Minister said.

The value of the krona, the currency Iceland has used for the past 137 years, increased nearly 90% between 2001 and 2007 before crashing back below 2001 levels during the 2008 financial crisis; sending the unemployment skyrocketing and forcing Reykjavik to accept a US$4.6billion bailout from the International Monetary Fund to avoid bankruptcy.

Fixing the Krona’s exchange rate to the euro would provide shelter for Iceland’s still fragile economy from the European Central Bank and could be implemented as early as mid-2015, Ms. Sigurdardottir said. The vast majority of the country’s 320,000 inhabitants favour ditching the krona, though most of them also oppose joining the monetary union of the nearby mainland.

Alan Bones, Canada’s ambassador to Iceland, intensified discussion around the idea of Iceland adopting the loonie in a radio interview last week. He told Iceland’s national broadcaster Ottawa would “certainly be open to discussing the issue,” while cautioning it would effectively grant Canada’s government control over the Icelandic economy.

Mr. Bones was set to speak about the risks of adopting a foreign currency at a March 3 conference in Reykjavik hosted by Iceland’s leading political parties on the future of the krona, though his appearance was abruptly cancelled once his previous statement made its way across the Atlantic.

Economists say the impact on Canada of Iceland adopting the loonie would be negligible, since Iceland’s economy is less than 1% the size of Canada’s. Yet the idea “strokes the Canadian ego and bolsters the Conservative government’s line the economy is one of the world’s strongest,” reads an article in the latest edition of The Economist.

However, the British newsmagazine quoted Mr. Gunnlaugsson as suggesting his party’s support for adopting the loonie was “just a ploy” to get Reykjavik to consider alternatives to the euro. “It’s not like we are fighting for the adoption of the Canadian dollar,” he said.